The Federal Government's review will look at the practices of payday lenders who are often accused of charging interest rates on small loans in excess of 300 per cent.

AAP: Alan Porritt

The payday lending industry is about to come under more scrutiny, with the Federal Government announcing a regulatory review today.

The five-month investigation will look at the practices of payday lenders who are often accused of charging interest rates on small loans in excess of 300 per cent.

The payday review will be chaired by chief executive of Equipsuper Danielle Press, with panel members chair of Funds Management Victoria Catherine Walter and HWL Ebsworth's Stephen Cavanagh.

Assistant Treasurer Josh Frydenberg told the ABC's AM program the review will examine the effectiveness of current laws covering payday lenders or providers of small amount credit contracts.

"We recognise that they play an important part in the economy, in giving people access to credit where they may not be able to access it through mainstream finance but at the same time, we need to protect vulnerable people," Mr Frydenberg said.

"We need to ensure that the laws are fit for purpose and that the regulations strike the right balance."

"There are certainly cases where people have been irresponsible with their lending but there are also some restrictions but we want to look at the overall regulatory framework here," he said.

"We think this is a very important area and we want to protect vulnerable people."

Payday loans are typically less than $2,000 with a maximum term of 12 months.

However, critics of the industry said vulnerable consumers who do not repay on time and roll over loans often face annual interest rates of more than 300 per cent.

Mr Frydenberg said the review would also scrutinise consumer finance companies where interest rates and terms are also seen as excessive.

"ASIC (Australian Securities and Investments Commission) did some research in this area and for example it found that a Westinghouse freezer that may cost up to $600 for somebody to buy, may be able to be accessed through a consumer lease at $16.90 a fortnight for four years," Mr Frydenberg said.

"The total cost to the consumer there will be $1,764 and they won't even own the freezer at the end of those four years.

"Now, that does seem extremely exorbitant."

The review is scheduled to report back to the government by the end of the year.